State Income Tax: not always perfect

[braumeister]

Came across an interesting paper that looked at state income taxes being an incentive for high earners to move out. Seems intuitive, but I liked how they studied it.

According to study results, implementing higher taxes was not well accepted by many wealthy Americans -- their higher income allows them to be more mobile, and therefore able to seek new residency in states with lower personal income tax or no tax.

Abstract from the paper:

We evaluate how fiscal capacity and migration respond to the introduction of the individual income tax, drawing on new panel data on US states from 1900 to 2010. We find that the introduction of the income tax increased revenue per capita by 12 percent in the short term, 15 percent in the medium term, and 17 percent in the long term. The absolute level of revenue, however, did not significantly change over the long term for post–World War II adopters. To explain this, we show that the introduction of the income tax induced significant outmigration to non-income-tax states by middle- and high-earning households.

https://www.aeaweb.org/articles?id=10.1257/pol.20210388

 

[DrRoy]

People leaving California has driven real estate up in nearby states.

 

[Stormy Kromer]

I believe it. I live in a state with a high personal income tax, MN. I'm near the South Dakota border and have seen many higher income people move across the border. Some move their business HQ to SD. I'm not a tax expert but they told me that they did it because South Dakota doesn't have a personal income tax.

I know several retirees that moved their residences to a winter home in states with no personal income tax and spend just enough days there to qualify as residents.

Former MN Governor Mark Dayton comes from a wealthy family that has at least one family trust in South Dakota. I don't believe Gov. Dayton had anything to do with this but it is an example of how the wealthy will move their money to their own tax advantage. I'm sure it was all legal.

 

[braumeister]

It can certainly be a big factor for some. I have two friends who moved out of the midwest when they retired to live in Vancouver, Washington. No state income tax in Washington, and they do their shopping just across the border in Portland, Oregon where there is no sales tax. It was a very deliberate decision for them.

But that's a small, special case. I think the outmigration of wealthy people from high tax states is a much larger issue.

 

[MichaelB]

<mod note> Posts have been removed from this thread. Please keep the discussion free of state bashing.

 

[Rianne]

Illinois does not tax retirement income. I'm a counselor for the AARP free tax return service. I've done so many returns this year where retirees pay "0" state tax on their retirement. They leave happy

 

[jebmke]

Illinois does not tax retirement income. I'm a counselor for the AARP free tax return service. I've done so many returns this year where retirees pay "0" state tax on their retirement. They leave happy

Many states have partial or full exclusion of retirement income.

That said, if I wrote down the top five criteria for where we decided to retire, taxes don't make the list.

 

[Dash man]

Here in PA we have a 3.07% personal income tax rate. Retirement income is not taxed. We can deduct contributions to any 529 plan from any state. We can also get a 90% tax credit for donations to any Catholic school we choose, through a foundation, that is used to reduce tuition for those in financial need. So all in, I pay very little in state income tax.
However, they have an inheritance tax that will make up for that when we pass. We have no plans to permanently leave the state to avoid that. Most of our family is nearby.

 

[Aerides]

I wonder how many of the very-wealthy migrate on paper, without actually physically moving. Establishing a modest 2nd home in a low-tax state may well be far cheaper than paying taxes in one's home state, though I know there are lots of loopholes and rules about how many nights you are really in one place vs. another.

Many big US companies establish their HQ's in places like the Cayman's, Bermuda, Ireland, just for tax minimizing/avoidance/evasion, etc.

I live in a no-state income tax state. But I pay property taxes and have higher home insurance than other areas. I think a lot of it evens out in the wash.

And yeah...taxes do not even come into consideration on "where do I want to live for the rest of my life?"

 

[Rianne]

Many states have partial or full exclusion of retirement income.

That said, if I wrote down the top five criteria for where we decided to retire, taxes don't make the list.

Right, my entire family except for one brother who lives in Ft. Lauderdale, lives in IL. Most of them are in the city I live in. There are 16 of us within driving distance from each other. That's the #1 reason we're here. The 0 state tax is just icing on the cake.

 

[calmloki]

Heh - two cookies later kinda guy here. We have houses in Oregon and California and shifted our state of residence to California. State taxes are a bit higher, not much, but inheritance tax in Oregon kicks in at a much lower number and real hard. Is it delayed gratification feeling satisfied you've reduced an expenditure that won't affect you?

We've friends who draw hefty California pensions and built a place in Pahrump NV (not the scenic/resort capitol of the world) to avoid Ca state tax. They are very careful about showing their financial heads here in the sunshine state, which has some really aggressive tax collection computer goons.

 

[GenXguy]

Right, my entire family except for one brother who lives in Ft. Lauderdale, lives in IL. Most of them are in the city I live in. There are 16 of us within driving distance from each other. That's the #1 reason we're here. The 0 state tax is just icing on the cake.

I'm in IL also. It's not a 0 state tax for non-retirement income, and Illinois has increased state income tax 65% from what it had been for many years, and the property taxes are very high, and high gas taxes which go up automatically now compared to surrounding states, and high yearly increasing minimum wage driving up costs more in the state. So people are still leaving the state. Yeah, I have family mostly in the same general area of the state also.

 

[marko]

Mass just instituded a 4% surtax over the flat 5% for those making over 1MM.

We have three friends/acquaintances who've either moved 20 miles north to New Hampshire or made Florida their new primary residence.

I've said it 100 times: The rich have too many options to be roped in. Even when they lose, they win.

 

[HenryD]

I believe it. I live in a state with a high personal income tax, MN. I'm near the South Dakota border and have seen many higher income people move across the border. Some move their business HQ to SD. I'm not a tax expert but they told me that they did it because South Dakota doesn't have a personal income tax.

After decades in MN (3 for me, 5 for DW) we moved our residency to SD when we went nomadic. SD actively encourages this and makes it very easy, only requiring physical presence 1 day every 5 years. The lack of a state income tax is saving us low five figures annually. We spend very little time in MN or SD and own property in neither. The main drawback has been the lack of a physical residential address. Although the FDIC guidelines and the Patriot Act allow for this, some banks have their own interpretations.

 

[Chuckanut]

My home state recently initiated an [-]income[/-] excise tax on capital gains over $250,000 a year. One of the richest guys in the world moved from here to Florida which has no income tax (or similar tax with a different name). Then he sold six billion dollars of stock. The excise tax in his previous home state is 7% on the capital gains. Though I don’t know for sure how much of the sale was capital gains, he had to save millions upon millions of dollars by moving to Florida.

 

[athena53]

My brother the tax accountant re-domiciled to FL from NC after retirement. He said that the savings in state income taxes covers the cost of the place they bought in Melbourne with the indoor pool. (Brother retired as partner in a large firm.) They keep a place in NC but my brother is VERY careful to do everything possible to make FL his valid primary address- number of days spent there, church membership, doctors, etc.

I've always said that the very wealthy have options the rest of us don't, and they WILL exercise them if they feel they're being over-taxed. You do need to look at the big picture, though. If there are little or no state income taxes, where do they make it up? Sales taxes? Property taxes? How do they treat SS and retirement account withdrawals? At one point I realized that IA, where I'll eventually move to be with family, wouldn't tax my SS, unlike my current state, but the higher income tax rates would more than offset the savings. (My own state finally quit taxing SS this year.) I've since found that IA does not tax retirement account withdrawals, which makes me consider relocating before RMDs kick in.

In my brother's case, FL gets its taxes from the tourists.

 

[Montecfo]

These states that raise taxes on the "rich" usually fail to raise the expected income. States somehow expect taxpayers to just take that year after year when they have options.

 

[Aerides]

These states that raise taxes on the "rich" usually fail to raise the expected income. States somehow expect taxpayers to just take that year after year when they have options.

Wishful thinking, but if FL added some income tax and it reversed the influx, and we started dropping in population that might make it a better place to live for those that stay. Less congestion!

 

[GenXguy]

Wishful thinking, but if FL added some income tax and it reversed the influx, and we started dropping in population that might make it a better place to live for those that stay. Less congestion!

I had some cousins move down to Florida to The Villages year round. I lived there about one year many years back (FL, not The Villages).

It looks like Florida is high in both people moving there and people leaving, but still increasing in net. That gap should narrow as things get worse in FL, but an income tax would help and maybe reverse the flow sooner.

 

[threeonesix]

TLDR

When I encounter stories like this, where an author claims that wealthy people are abandoning their home states for financial reasons, I always wonder ... who are these people who are willing to leave their families and friends just to save a little money? I am by no means wealthy but I am financially healthy, and I would never consider leaving my local, lifelong friends at my age (53) even though I live in one of the highest taxed states in America. While taxes here are very high, the cost of living offsets that. If I were to move to a state with lower taxes, including no state income tax, it would cost me a great deal just to buy property to live in.

https://kansasreflector.com/2022/05...evails-in-tax-appeal-to-kansas-supreme-court/

Gene Bicknell is/was a friend of my father's many years ago. Dad sold him many cars back in the 70s/80s/90s.

 

[marko]

TLDR

When I encounter stories like this, where an author claims that wealthy people are abandoning their home states for financial reasons, I always wonder ... who are these people who are willing to leave their families and friends just to save a little money?

Maybe their friends and family are already there and this is just the final push they needed. That is certainly my case.

"A little money" though is relative. In my personal case I'd save about $30,000 a year just by making my Florida home my permanent residence. Not a lot, but not chump change either.

 

[SecondCor521]

There was a time about three years ago when one of my children wanted to transfer to a different university which also happened to be a public state institution. The difference between in-state and out-of-state tuition had me doing the math, which said it would have been economically advantageous for me to move there for a few years.

People do have options, and people with some degree of wealth are typically also the kind of people who can and will "do the math" and then consider the financial implications (along with other factors) to decide what to do. That's probably one factor contributing to accumulating the wealth in the first place.

 

[braumeister]

When I encounter stories like this, where an author claims that wealthy people are abandoning their home states for financial reasons, I always wonder ... who are these people who are willing to leave their families and friends just to save a little money?

I think we're talking about seriously wealthy people who have many (or at least several) homes, usually fully staffed at all times so they can casually move among them.

 

[rodi]

If I were only looking at taxes for where to live in retirement, I wouldn't live in Southern CA. But as a percentage of our total budget, it's a small factor... Have a paid for house with prop 13 low tax rates. No W2 income, but pay taxes on rental income and inherited IRA RMDs plus a tiny pension. Husband has some SS, but that's treated somewhat favorably.

But - we have *perfect* weather. I walk the dog on the beach at least 25 days a month. (High tide or drizzle effects 5 or so days a month). My sister lives in the same area. I have friends dating back to grade school. And my husband (a Philly native) has informed me we are never moving from San Diego.

There's more to 'what makes a good place to live' than taxes.

 

[Stormy Kromer]

I think we're talking about seriously wealthy people who have many (or at least several) homes, usually fully staffed at all times so they can casually move among them.

The owner of an ice cream company in SW MN bought a jet and flew back and forth daily to his new home in Sioux Falls when he got fed up with MN income tax. 75 miles commute by lear jet. He said the plane paid for itself in income tax liability.

Another family I know in my same small home town moved their corporate HQ 28 miles to a small town in SD. This town didn't have a decent bar so they built one. They all built new homes in SD and changed their residence. Said it will save them millions in their lifetime.

MN taxes CG as ordinary income and SS just like the Fed, 85% for most of us. All retirement income is taxed as ordinary income. Not on a small level, around 7% Side note, MN also has a death tax that starts around $3M, much lower than the Federal limit. Sales tax is high, but not on food or clothes.

Lots of folks will move 28 miles for these tax law differences. Most of their family has moved with them, the rest are only 28 miles away.

I'm not bashing any state, only pointing out some facts and that if you tax people too much some will move. I am thinking of it myself.

Not to get political but in discussion on this forum, people will move to another state if the political leaders in their state tax them too much and they have other alternatives. Politicians have to act more like a business and realize that their constituants (customers) have other options and may act on them. Don't be surprised if they move if they get a better offer.